Ep. 28 | Self-Employed Basics
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Speaker 2:Hey, everybody. Welcome back to Teaching Tax Flow the podcast. On to episode 28, self employed basics. In this episode, Chris and myself are gonna run through a lot of little tidbits, if we can call them that. Just really into making that plunge or if you've already made the plunge and you are self employed already.
Speaker 2:Maybe some things that we'll kinda chat about that'll give you a little bit of advice to help you plan for, for next year, or maybe go back a little bit and adjust the way that you've been doing things, but fantastic episode. We cram a lot into about fifteen minutes here. So hang on. One other thing, be sure to go on to teachingtaxflow.com backslash store. There's actually a self employed basics mini lesson we know you guys will love.
Speaker 2:If you're already a member of Teaching Tax Flow, you'll see that in your dashboard, so be sure to check that out if you haven't done so already. But before we jump into the episode, let's take
Speaker 3:take a moment and thank our sponsor.
Speaker 2:This podcast is brought to you by Strategic Associates. Are you a high income earner, real estate investor, or successful entrepreneur who is frustrated by having to pay $75,000 or more of annual tax liability? If so, Strategic Associates can help. Your first step to saving thousands, if not hundreds of thousands, is to contact Roger Roundy at roger@strategicag.net or by calling (801) 641-2956, and be sure to tell them TTF sent you. Welcome back to the podcast, everybody.
Speaker 2:I am the cohost here, John Trupalski. Chris, how are we doing, man?
Speaker 3:Oh, I'm another cohost. Chris Picuro here with Johnny t. There he goes. Place to be.
Speaker 2:We can't let him escape this. Another great topic. So this one was actually brought to us and voted on by the members of the defeating taxes private Facebook group. So if you did not vote, shame on you. If you're not a member of that group, big shame on you, but let's cut to it.
Speaker 2:So we're gonna talk about self employment basics. So really what that means is those of you that are self employed, you may be familiar with some of this, maybe not. Might be a little refresher, maybe some new information. So we'll get into it. We'll give you a little introduction on it.
Speaker 2:We'll jump into the some of the formation management and asset protection, taxation, reporting, fringe benefits, IRS guidelines, and maybe even leave you with a little call to action. So without further ado, let's get in it. And, Chris, give us basically a a five you know what? Do it in two seconds, I dare you. Maybe a little longer.
Speaker 3:What does it mean to
Speaker 2:be self employed? Work for yourself. Bingo. I'll take it. Excited on your life.
Speaker 2:I'm proud of you, buddy.
Speaker 3:Impressive myself also.
Speaker 2:I would love I would love of course. It's you you should be, right, because you know all this information. So let's let's look at it from the perspective of somebody that may have had this idea. They really wanna take the plunge. Right?
Speaker 2:They really wanna look at themselves in the mirror every day and say, you know what? I'm self employed. No. I doubt we're gonna have a giant tattoo that says, I am self employed. That's my goal.
Speaker 2:But let's look at it. Where do they start? Where's step one?
Speaker 3:Well, I think something first of all, it's
Speaker 2:a pleasure to be here and by acting on
Speaker 3:a teaching tax slow podcast. And, John, if you are not in the defeating taxes private Facebook group, just go to defeatingtaxes.com and jump in there. We wanted to hear from you. Self employed. One misconception I think that we have is that someone that is self employed is full time self employed.
Speaker 3:We have several people that are employed and also self employed. A great example is and there's a previous podcast is someone in the gig economy, Uber driver. We love our Uber driver guy, don't we? Or girl. They keep us out of truck.
Speaker 3:Musician. So real answer. What you're saying here, just to
Speaker 2:make sure that I heard you right and everybody else did, you can be both. You're not in one bucket. You can be in both. You could be a full time employee somewhere, and you can be self employed in the other.
Speaker 3:Exactly. If you are earning income based on a performance of a service or running a business, you are by default self employed. Self employed people are not required to file a form document with any state filing agencies. They don't even have to file with a or assume name certification, it could be John Schapolski proprietor. So an owner someone that is self employed is also referred to as a proprietor.
Speaker 3:And like I said, there are no there's no formal entity documents required. You don't have to file LLC documents with the state. You're just a you're just a proprietor. Now you might if you hire employees or collect sales tax or anything like that, that's a different issue which we're gonna dive into in a few minutes. But just forming your entity, there's no formality to it.
Speaker 3:By default, you're self employed if you're earning income by conducting a business or being a consultant. And one of our first podcast was really focused on single member LLC. So go back and listen to
Speaker 2:that one too after we're done here, but you bring up a good point. Right? So maybe that giant barrier to entry for some into becoming, quote, unquote, self employed is they think it's a lot harder than it is. Right? So it's very simple in a sense.
Speaker 2:It's just having somebody who's on your board of directors. There we go. Another previous podcast. And really just being along for the ride with you as far as for when
Speaker 3:it comes tax time. Right? Exactly. When we're talking about the formation of management, the business begins, exists, and concludes based on the proprietor's activities. If you start your own business, John, and a week later, you say, this is terrible.
Speaker 3:I don't like it, and you close your business, that business is done. There's no filing a form with the state. There's it's just done. That proprietorship is complete, and this is a great option for business owners that want simplicity. They're just getting started with their business.
Speaker 3:They're not necessarily worried about asset protection. And, that being said, one thing to consider on the asset protection side is that proprietors or self employed people are typically liable, though, for the debts of the business. So if the business goes out and gets a a credit card or a loan, typically, the proprietor will be liable personally for that debt.
Speaker 2:And that's where the LLC would come into come into play, protect protection of assets.
Speaker 3:Exactly. The the best feature of an LLC is going to be the asset protection and and inebity.
Speaker 2:But the IRS does not give a flying hoot that you have a LLC.
Speaker 3:Well, I wouldn't say they don't give a hoot. They just that you'll have to check that episode out.
Speaker 2:There we go. Because it's still bleeding.
Speaker 3:But the point is a single member LLC is a disregarded entity for tax purposes. Once you start getting into multi member LLCs, then the IRS would give a little bit of a hoot.
Speaker 2:So perfect. Perfect. So jumping into some of the other areas. Right? So we we talked about formation.
Speaker 2:So let's get into taxation, reporting, and fringe benefits. So likely, the taxation reporting is what scares people about this. The fringe benefits is probably what draws a lot of people to it. So walk walk us through this a little bit. I know we probably you know, in the mini lesson, that's part of teaching tax where we go into a lot more detail on it, a lot more explanation.
Speaker 2:I wanna say there's probably a dozen bullet points that we specifically hit on here and elaborate on, but walk us through this a little bit and maybe from both sides of it. Right? Like you just said, the what scares versus what draws. The taxation reporting being a little freaky, you know, a little bit scares people off maybe, and the fridge benefits being really just that, the benefit.
Speaker 3:The first thing to understand is that the so let's go back to John Chipolsky Carpenter. Oh, I like it. I sound useful. Oh, you're very useful. You're very useful, which actually, you have a general contractor's license, but that's another episode, John.
Speaker 3:We're gonna talk about that in the future. John Chipolsky Carpenter, you create you're now a sole proprietor. John Chapulski Carpenter, the sole proprietorship or the business we call the entity is not taxed. No tax is paid by your entity. All so we're talking about taxation.
Speaker 3:All the tax reporting is is all the tax profit and deductions are put on your personal tax return. Typically, that means that it's going to go on a schedule c. So in that schedule c, you're gonna pay an ordinary, your your marginal tax rate, and you're going to be subject to self employment tax. So from a tax perspective, typically, a sole proprietorship is taxed at at the highest rate out there. Now most many sole proprietors don't have much of taxable income or a profit when they start, so they're not too concerned about that.
Speaker 3:So with that too, an an example being and correct me if I'm wrong. So say you have, say on your w two, you're collecting, say, we'll just say
Speaker 2:a hundred thousand a year in annual income. So you have a hundred thousand. Say you went out on your own. In your first year, you had a very large marketing you know, your marketing expense or sales expenses outweighed your your revenue. So say you had a $25,000 loss.
Speaker 2:So, really, what you're saying here is when it comes time to report on you've made $75. Right? Did does it offset or you you mentioned that they're separate, but they're linked together some of your carryovers.
Speaker 3:On the tax reporting side, your w two wages will be reported separately than your business. Your business will rep will report a loss. In that case, it would be on schedule c. And then assuming you have something called material participation, which the vast majority of businesses, self employed people have that with their business. Let's assume that you do have that.
Speaker 3:That $25,000 loss would offset the w two wages, and it would reduce the federal tax that you pay. And that would be reported on a schedule c. So that's the tax reporting side. The plus oh, no.
Speaker 2:I was gonna say in that topic too on material participation. So in layman's terms, it basically means that you're involved in the operations to some regard.
Speaker 3:Exactly. We in in teaching tax flow, we have a lot of resources as far as passing the material participation test, but the vast, vast majority of sole sole proprietors or self employed folks pass the material participation test. So that all gets reported on schedule c. The positive is if you're self employed and you're paying health insurance premiums, instead of those premiums being a personal deduction as an itemized deduction, yes, there's another podcast on itemized deductions, the schedules you can offset or you can rededuct those health insurance premiums, what we call above the line, but as a as a business deduction as long as your as you have as long as you have net income with schedule c. Now those health insurance premiums, not to get too technical, so but we don't want people driving off the road.
Speaker 3:Those health insurance premiums that are deducted are not, they don't offset self employment tax, but they do offset federal tax. And one thing to consider too, we have a lot of self employed people out there that pay medical Medicare premiums. Let's say they're drawing Social Security, yet they're still self employed, those Medicare premiums are deductible against your self employment income. So that's
Speaker 2:a little tip. And and with that too, and and this one, I really don't know the answer to. Usually, I know a lot of these brass too anyway just to verify, you know. But say you have a spouse who's in public education. So say well, whatever job.
Speaker 2:Say that health care is a benefit that they receive, but you are the individual that is self employed. Mhmm. Is that still considered a fringe benefit, or is there a separation in there? Well, that
Speaker 3:would be a fringe John, are you talking about me? My wife's Oh, yeah. So there is. So he asked yeah. Yeah.
Speaker 3:I'm exactly talking about that. There is a so here's what would happen. The fringe benefit for the person in education would be working so if they are on a group health insurance plan and they're making contributions to the group health insurance plan, they're going to get a tax deduction for that. That's going to be a, a section one twenty five cafeteria style deduction, and it'll come off of your w two wages for the educator before you pay tax. Now me being self employed, if I have profit and let's say it's really expensive for me to be on that policy and I take out a personal health insurance policy, then
Speaker 2:I can offset my self employment income with my my policy. Excellent. And I know that's a whole another area. So that thank you for jumping into that. So looking looking down that list a little more, what are a few other things we'd be looking at here?
Speaker 3:One more thing I wanna talk about as far as the reporting. Proprietors are most likely gonna qualify for the section one ninety nine a or qualified business income deduction, which is an additional federal deduction of up to 20% of your net income. We're gonna do an episode in the future with some advanced self employment tax strategies. We talk about blending strategies a lot. So but what there are times is because I know you mentioned fringe benefits where a proprietor could legitimately hire their spouse and provide fringe benefits to their spouse as the only employee, and that's that's a way that you could find, an avenue to take personal expenses, which are health health care expenses, and make them all tax deductible.
Speaker 3:So there there's some flexibility there, but in general, that those health insurance premiums, that's an advantage of being a sole proprietor that you can deduct your health insurance premiums against your net income typically from schedule c. Awesome. Awesome. So thank you again for recapping that. So so so really with that, what I'm taking from
Speaker 2:it, right, is there's low barrier to entry into becoming self employed. It's a lot easier than some people think so far in our conversation, but then also there are some very significant fringe benefits. So some of the stuff people talk about is, oh, it's a write off. It's free. It's not the case.
Speaker 2:So some of those myths, we'll talk about later. I know we have a whole another podcast we were discussing dismiss. But let's keep going down the list here. So what are some other things that we can add to this regarding, you know, kind of staying in the in the basics? Right?
Speaker 2:So what are a couple call to actions? What can we leave some of these listeners with? Say, you know, here's a couple points to take these home with you. Remember these. Write them down in your notebook.
Speaker 2:Press repeat over and over and over again on this podcast. What are
Speaker 3:a couple Right. So for someone that is self employed and owns rental properties, in general, as I as I said before, you're gonna report those rental properties or you're gonna report your self employment income on schedule c. In that case, you as a rental property owner that's self employed, you're gonna report that typically on schedule e. And then also if you're a farmer, there's a separate schedule for that called the schedule f. When we talk about calls to action, here's what you wanna think about.
Speaker 3:If you have a business or looking to start one, really determine if the self self employment fits your current needs and your needs for the next two to three years. You can evolve to forming an an entity in the future, but, typically, when you're first starting out, sole proprietorship is is your best option. That being said, if you're concerned about asset protection and comfortable with the compliance cost, you can consider forming an LLC right from the get go. Mhmm. Most people that start off a business start as a sole proprietor.
Speaker 2:Excellent. And that's a recap again. Any LLC questions, I believe it was episode two or three that we did specific on that. We go into a lot of details. So great resource there.
Speaker 2:Exactly. If you're self employed, you may have heard about the s corporation election strategy. Consider forming an
Speaker 3:s corporation to legally and ethically reducing your self employment tax paid if you are self employed and you have a significant amount of net income. We are gonna have a s corporation basics episode as well. S corporations can be a fabulous thing and can be utilized by many taxpayers to legally and ethically reduce the tax they pay, but there are a lot of considerations. And I actually see it as an it's I wouldn't say it's overused, but it's misdiagnosed. We talk about diagnose, prescribe.
Speaker 3:For the right taxpayer profile or diagnosis, the s corp makes sense. So if you're if you're thinking about that, again, jump into that private Facebook group and and utilize the resources that Teaching Tax Flow has. And with that, with an s corp, say you elect to to file as
Speaker 2:an s corp, you're you're in a sense you're an employee of the corporation. So without going into detail, is that so correct?
Speaker 3:Yes. You are. You have completely changed things from a tax perspective. Now proprietors with real property, it's extremely rare that you're gonna benefit from an s election. Sometime now if you're in the house flipping, or wholesaling, sometimes s corp does make sense, but to buy and hold rental property, s corp election less than one percent of the time makes any sense.
Speaker 3:And I already talked about potentially hiring your spouse or a family member if they're doing legitimate work for your business, and your trip you wanna take advantage of more fringe benefit deductions. And you always consider what state you live in. I talked about the s corporation in the state of Tennessee where I reside. We have a Tennessee franchise and excise tax, which really hinders the value of an s corp election. Every state is different.
Speaker 3:Excellent. Well, thanks for thanks, Chris, for jumping into this. I mean, I
Speaker 2:mean, I know we kinda hit this a little bit faster than some, but I think we hit all the really good basics. And, honestly, I know we mentioned the the private Facebook group, the defeating taxes Com. You can go directly there. It'll drive you direct to that group on Facebook. If you're not on it, join that group, make a post, ask a question on there.
Speaker 2:You'd be very surprised how many people come out of the woodwork to support each other. Any questions on that? I know we have a lot of people on there that are self employed, anything from lawn care maintenance. I know there's a lot of contractors, construction guys on there, a lot of real estate investors. So we have a wide variety of people on there.
Speaker 2:So please, please, please put make those posts on there. And besides that, we're gonna keep rolling here with these great podcasts and great shows. Send us over any ideas or any questions you guys may have on the podcast specifically. We'd love to keep elaborating on it. So Absolutely.
Speaker 2:Do not be afraid to
Speaker 3:be self employed. This country has been built by tons of great self employed folks and entrepreneurs. And with the right resources and the right knowledge, you're gonna make sure that you're equipped to legally and ethically reduce your tax and create the right business entity to operate your business in the season that you're in. Thank you so much for listening. Johnny t?
Speaker 3:Yeah.
Speaker 2:That was quite the mic drop exit there. You're like, boom. Knowledge bomb. Take it.
Speaker 3:You gotta leave it yeah. Exactly. You wanna finish strong. There you go. There you go.
Speaker 3:And to back it up even more, so really the only thing you could do wrong well, not the only thing, but probably one of
Speaker 2:the biggest things you could do incorrectly, we'll say, with go making that plunge or or going that route with self employed is just not planning. If you don't plan for it, you're going to make a mistake. So until then, we're gonna plan for next week, and we will see you here in seven days with our next podcast. Thank you so much for joining us, and see you next week. Hey, everybody.
Speaker 2:Thank you again for joining us here on Teaching Taxville, the podcast. This was a great episode for anybody as mentioned early on and throughout it, that if you're ever considered going into business for yourself, being titled as quote unquote self employed, Chris had made a fantastic point though about you don't have to be full time self employed. You could be full time at your day job and also be a gig worker, be a part time self employed individual. If you have a hobby business, maybe you're selling something online. So you have an e commerce business, etcetera.
Speaker 2:Various, countless ways you could be self employed. That's an important point to make. And thank you, Chris, for doing that. It's a great way to figure out if if it's right for you before you fully take the plunge. Right?
Speaker 2:Put your put your doughs in the water, just dip them off the end of the dock and and see how it goes. If it works out great or if it grows into something much larger, then obviously you'd feel more comfortable making that total shift, to being full time self employed. So again, thank you everybody for joining us on this. There is as mentioned in the intro of this show, if you go to teachingtaxflow.com backslash store, there is a self employed basics lesson. We put it together really related to this episode, but dives through some stuff goes goes into a little bit more detail.
Speaker 2:But obviously, as we talked about fringe benefits, asset protection, entity formation, etcetera, that could be a whole series of lessons and episodes just on those. Just going into this into the specific details on those. There's there's a ton. But this will really set you up or at least kinda set the set the framework if you will, if you've considered going into business for yourself. So thank you everybody for joining us on here.
Speaker 2:This was a great episode that was as mentioned as well, voted on and suggested by a member of defeating taxes. So if you're not on there, hop on there, join us. This is your personal invite as I like to say. You can't say we didn't invite you because here it is. Hop on there, chime in on those conversations, send any questions, any messages you have.
Speaker 2:It's a great platform. We look forward to seeing you.
